Good day, ladies and gentlemen, and welcome to the CAE Second Quarter Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz..

Good afternoon, everyone and thank you for joining us. Before we begin, I would like to remind you that today’s remarks, including management’s outlook for fiscal year 2021 and answers to questions contain forward-looking statements.

These forward-looking statements represent our expectations as of today, November 10, 2020 and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties.

Actual results may differ materially and listeners are cautioned not to place undue reliance on these forward-looking statements.

A description of the risks, factors and assumptions that may affect future results is contained in CAE’s annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR at www.sedar.com and the U.S. Securities and Exchange Commission on EDGAR.

On the call with me this afternoon are Marc Parent, CAE’s President and Chief Executive Officer and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we’ll take questions from financial analysts and institutional investors.

And following the conclusion of that Q&A period, we will open the call to questions from members of the media. Let me now turn the call over to Marc..

Thank you, Andrew, and good afternoon to everyone joining us on the call. I’ll first discuss some of the highlights of the quarter, and then Sonya will provide additional details about our financial performance. I’ll come back at the end to talk about our outlook.

We began the fiscal year just as the brunt of the pandemic bore down, and while we’re managing through a still difficult environment eight months later, we’re starting to see the results of our cost and cash actions, and our initiatives to strengthen our market position.

We drove solid sequential improvements in our second quarter, which is testimony to these efforts and to the resiliency of our business, which is largely recurring and driven by regulations.

We delivered $0.13 of earnings per share and we generated $45 million of free cash flow, which is a good reflection of the cash generative nature of CAE’s business. We also booked $668 million in new orders for a 0.95 times book-to-sales ratio.

We saw sequential improvements across all business segments in the quarter, most notably in Civil, where revenue increased 47% compared with the first quarter. This was driven by 49% average training centre utilization and the delivery of 10 full-flight simulators.

Demand improved in both commercial and business aviation training, with the latter recovering more rapidly, driven by the relatively higher level of activity involving the global installed fleet of business aircraft.

Civil enjoys a high degree of operating leverage in training, and the higher volume helped drive its operating margin back to the double-digits coming in at 14.2%. We also continued to book new orders, with Civil signing training solutions contracts valued at $353 million.

These included three full-flight simulator sales, a five-year business aviation training agreement with a charter company in the United States, a five-year exclusive training extension with Virgin Atlantic, a two-year business aviation training agreement with XOJet Aviation and a two-year business aviation training extension with VistaJet.

In Defense, we also began to see a more positive picture than the first quarter, with some movement on programs impacted by COVID-related restrictions and the resumption of certain training operations. Defense revenue grew 8% over the last quarter and operating margins improved to 8.0%.

Notwithstanding a still challenging environment, Defense booked orders for $278 million, including contracts to continue providing fixed-wing flight training and support services to the U.S. Army at the CAE Dothan Training Centre, and to support Leonardo with AW139 and AW169 full-flight simulators.

Other notable contracts, including providing the United States Air Force with upgrades and enhancements to both the KC135 and C-130H aircrew training system programs.

Defense also received orders for maintenance and logistics support services for the German Air Force's Eurofighter training devices, and to support the development of a Single Synthetic Environment for the U.K.’s Strategic Command. In addition, we were awarded a prototyping contract to support the U.S.

Special Operations Command Global Situational Awareness program, which will leverage synthetic environments to fuse data into a common operational picture for improved planning and decision support. And in Healthcare, revenue grew by 66% compared to last quarter and was 22% higher than last year.

With the benefit of additional volume and the commencement of CAE Air1 ventilator deliveries, Healthcare’s margin reached 8.6%. I’m very proud to say that we are continuing to support healthcare workers in the fight against Covid-19, with complementary webinars and learning modules for clinicians.

We’ve recently developed a Pathogens of High Consequence learning module to help prepare clinicians for infectious disease outbreaks. Not only is this the right thing to do, being there for our customers and front-line workers in this difficult time, I also believe it cements CAE as a leader in developing training content in the healthcare space.

With that, I’ll now turn the call over to Sonya, who will provide additional details about our financial performance. I’ll return at the end of the call to comment on our outlook.

Sonya?.

Thank you, Marc, and good afternoon, everyone. Consolidated revenue of $704.7 million was up 28% compared to the first quarter and is 21% lower compared to the second quarter last year.

Segment operating income was $79.3 million, compared to a loss of $2.1 million before specific items in Q1, and an income of $126.0 million before specific items last year.

Quarterly net income before specific items was $34.2 million, or $0.13 per share, which on the same basis compares to negative $0.11 in Q1, and $0.28 in the second quarter last year. Free cash flow was $44.9 million in the quarter, which is an improvement over the negative $7.1 million free cash flow result last year.

The increase results, mainly from a lower investment in non-cash working capital, the suspension of the dividend, and lower maintenance capital expenditures, partially offset by a decrease in cash provided by operating activities.

We expect to be free cash flow positive for the year, based on our expectation for continued positive operating cash flow and the expected timing of reversals in our non-cash working capital accounts. Return on capital employed, before specific items, was 7.2% this quarter, compared to 8% last quarter and 11.5% last year.

Growth and maintenance capital expenditures totaled $15.2 million this quarter and for the first half of the fiscal year, totaled $33.2 million relative to our outlook of approximately $50 million.

We expect total CapEx of approximately $100 million for the year, commensurate with our opportunities to invest incremental capital with accretive returns and free cash flows. Income tax recovery this quarter was $1 million, representing an effective tax rate of 14%, compared to 17% for the second quarter last year.

The tax rate was lower due to the impact of restructuring costs, partially offset by the change in the mix of income and losses from various jurisdictions. Excluding the effect of the restructuring, the income tax rate would have been 25% this quarter.

Our net debt position at the end of the quarter was $2.4 billion, for a net debt-to-capital ratio of 50.1%. And net debt to EBITDA before specific items was 3.16 times at the end of the quarter. All told, between cash and available credit we continue to have approximately $2 billion of liquidity.

We are making good progress with our recently announced restructuring program, intended to enable CAE to best serve the market by optimizing our global asset base and footprint, adapting our global workforce and adjusting our business to correspond with the expected level of demand and the enduring structural efficiencies that we will drive.

These measures include the introduction and acceleration of new digitally enhanced processes such as remote installations and certifications and work-from-home practices.

We continue to expect to record restructuring expenses of approximately $100 million for the entire program, which will be carried out in fiscal 2021 and into fiscal 2022 consisting mainly of real estate costs, asset relocations and other direct costs related to the optimization of our footprint and employee termination benefits.

Actions include the consolidation of some facilities so that we gain the efficiencies of operating from larger centres, and we will also be relocating several training assets to optimize utilization.

Taken together, these measures are expected to enable CAE to emerge from the current period from a position of strength and we expect to fully realize our annual recurring cost savings of approximately $50 million starting in our fiscal 2022.

We began executing our restructuring program this quarter and as of the end of September, we had incurred $51.1 million of restructuring expenses. With that, I will ask Marc to discuss the way forward..

Thanks, Sonya. The COVID-19 pandemic continues to be a day-to-day global reality, and we are encouraged to have learned yesterday of the progress being made to discover a vaccine to this terrible affliction that has so deeply affected the lives of so many.

As we consider the step-change improvement in quarterly performance that we just delivered, we recognize that the continued pace of CAE’s recovery from this point forward will be highly correlated to the rate at which travel restrictions and quarantines can be safely lifted and market activities resume.

Short-term visibility in that context remains limited; however, I take confidence in the fact that we’re in a better position now than we were at the start of the fiscal year, and we continue to expect a stronger second half. Looking beyond the current period, we remain encouraged by CAE’s long-term prospects.

We’re seizing opportunities to strengthen CAE internally during this period and as you’ve heard from Sonya our restructuring program currently underway is on track.

We’re also well positioned to bolster our standing as the global market leader in our field through the application of advanced technologies and by expanding the aperture of our market reach.

We’re continuing to invest in CAE’s capabilities to revolutionize our customers training and critical operations with digitally immersive solutions and to increase our market share. And we remain confident that CAE will remerge from the current period as an even stronger company.

Looking at each of our business segments, in civil, as the global fleet gradually recovers and daily flights resume service, we expect to continue to expand our market share and secure new customer partnerships with our innovative training and operational solutions.

We continue to have discussions with airlines about potential outsourcings and partnerships. And while we don't control the timeline of these agreements, we expect some from our pipeline to come to fruition in the period ahead. At a steady state, business aviation training represents about a-third of our civil business.

And based on global aircraft fleet activity levels, we expect this segment to continue recovering faster than commercial aviation. Demand for civil full-flight simulators is driven by new aircraft deliveries. And while the total market is currently much smaller, we expect to maintain our leading share of available full-flight simulator sales.

We benefit from a large backlog of customer funded full-flight simulator orders, and we expect to substantially deliver this backlog over the next couple of years, including 35 to 40 this fiscal year.

In defense, we’re managing through a transition year, as we work our way through the short-term challenges brought by the pandemic, and as we ramp-up new leadership.

The long-term outlook for defense continues to be for growth, supported by a large addressable market for our innovative solutions and the realization of the benefits of our bolstered team and how that will bring to bear. I've been very encouraged by our recent competitive wins at large pipeline, which bode well for defense in the long-term.

Despite near-term headwinds, we're maintaining our leading position, as a training and mission support partner, thanks to our leading-edge capabilities in translating the physical world into the synthetic world.

We're expanding beyond training to become a leader in digital immersion, and the application of synthetic environments to support analysis, planning and operational decision-making.

With our expertise in the integration of live, virtual and constructive training, along with capabilities to address mission and operations support, we believe we'll make inroads into the broader defense market in the period ahead.

And in Healthcare, we've also bolstered our leadership to enable CAE to fully capitalize on the greater market appreciation of the benefits of healthcare simulation and training, to improve safety, and to help save lives. The pandemic is serving as a catalyst to accelerate digital transformation across the enterprise.

And in Healthcare, we see an emerging growth vector, with the ramp-up of distance learning this fall.

While still early, I'm encouraged by our progress, including new tools we just recently introduced, on how to deliver training using our platforms, Maestro and CAE Learning Space, which offer remote and distance learning capabilities for virtual clinical examination and telehealth training.

In closing, I'd like to thank all of the employees at CAE, who are collectively responsible for these solid results, against a macro backdrop that has been complex, and of course it goes without saying, under higher than usual uncertainty.

Our employees have conducted themselves, through these challenging last eight months with true professionalism and teamwork, retaining an impressive and singular focus, on serving our customers', as their partner of choice.

I'm truly inspired and humbled to lead this great team of people here at CAE and I couldn’t be prouder of how we rose up against an incredible macro event that's almost been like a wartime effort and are arising from it stronger and even more aligned together. With that, I thank you for your attention. And we’re now ready to answer your questions..

Thank you..

Operator, we would now be pleased to take questions from analysts and institutional investors..

Absolutely. Thank you. We’ll now begin the question-and-answer session for our analysts. [Operator Instructions] Our first question comes from the line of Steve Arthur with RBC Capital Markets. Please go ahead..

Great. Thank you very much. Just a couple of questions.

First, on the training center utilization, the 49%, I realized that is an aggregate of many different training centers, different simulator types, but just wanted to expand a little bit more on the dynamics within there, for example, the utilization at business jet training versus commercial or in addition to the recurrent training, any signs of more transition training as pilots move around for different aircraft types?.

Okay. Steve, I think that maybe a little slightly higher in business aircraft, it's been doing -- somewhat better based on the fact that there's been this aircraft has been less affected overall in terms of the flight activity, which is the driver for us. Commercial, I think it's kind of plateaued.

And as we said last quarter, it’s pretty much in line with the activity on of the aircraft, and the commercial aircraft that are being utilized right now.

If you look at the market right now, there's been -- it's been the overall commercial aviation, there's been a bit approximate 50% recovery in daily flight activity, which is obviously well off the lows back in April, which explains for the explanation for sequential performance here.

But it’s a more or less plateaued in recent months, as we went into the fall with the second wave and everything. Business aviation, as I mentioned, they're recovering faster to commercial and I continue to be bullish on that, because it is -- it does represent about a third of our Civil business.

And if you just look put some numbers around business jet cycles in the United States and Europe are within about 10% or 15% of pre-pandemic levels, which is pretty impressive when you think about it.

And anecdotally, I put it -- I provide a little color last quarter on this is our charter operator customers are seeing significant volume in business aircraft from customers, who are new to private jet travel, and in my experience came from nearly 35 years in this industry.

Once people experienced private jet travel, there tends to be a high retention rate. So that's the kind of color I would give you right now with regard to utilization..

Okay.

And is still the same dynamic within to more and more wet training with business jet training in a lower the growing amount in commercial?.

Yes. That's about right. Yes..

I guess just related to that, just any updates at all on the nature of the potential outsourcing agreements with airlines.

Of course, you can't get in any customer specifics, but are those kind of conversations still advancing? And what's the reception with the airline customers?.

No, absolutely. There's several discussions on the way that hasn't changed it. The dynamic continues the airlines are more amenable to partnering with us. It's become more resilient and have flexibility in their training operations by interning a fixed cost into a variable cost.

You can well imagine that airlines are pretty busy these days, there's a managing our operations, but I do believe that somebody deals will come to fruition. And it's just natural for us. So -- but we'll keep you informed as they -- we don't control the timeline as certainly and we're patient..

Okay. And I guess just the final one for me, just on the healthcare segment.

Any color you can provide on the contribution from the ventilators in the revenue in the past quarter, or the sense of the scale of that 10,000 unit order?.

Well, in the quarter, we had approximately $7 million of revenue that came -- from the healthcare sector that came from the ventilators, it's modestly profitable that's what we expect, we've been deliberate not to create expectations on the profitability of those ventilators, because although I do expect them to be profitable, cash generative, I mean we will imagine that what we're doing here is reacting primarily to what's really biological wartime effort here to do our fight against COVID-19.

And I'm extremely proud of what we've been able to do. But our top priorities on the contract are really making sure on the quality of those devices and the speed-to-market, because obviously we want to put them in the hands of the public authorities as quick as we possibly can.

Does that answer your question, Steve?.

Yes, no, I think it does understand that and appreciate it..

Okay..

Thank you..

Thank you for your question. Our next question comes from the line of Konark Gupta with Scotiabank. Please proceed..

Thank you, and good afternoon. So maybe just wanted to follow-up on the utilization trends. You spoke about commercial versus business aviation, within commercial obviously, there are multiple silos there as well like narrow body, wide body, as well as cargo.

I wanted to understand, given obviously a wide-body fleet still remains pretty much surrounded by 50% or so, narrow body might be doing better. So any sense you can provide on utilization rates for you guys on narrow body side, as well as cargo, given a lot of airlines and operators are accelerating passenger to freighter conversion.

So these states how are you leveraging those opportunities? Thanks..

Well, we don't -- I wouldn't break it down -- right down to that level. But I can tell you that, as we said before, about two-thirds of our training footprint is narrow body -- actually it's about 75% actually of our fleet is narrow body.

So we're willing to expose to that, and actually a lot of aircraft, those that we do have on wide-body some of that are being used for cargo, and we are actually seeing a lot of narrow body airplanes being used for cargo and being converted to that end..

Great.

But are you seeing any significant increase in cargo training, Marc?.

Well, definitely there's more -- I'm not saying that you don't know, there's a lot more cargo activity. And to the extent that we train cargo, yes, we have seen improvement in that car -- in the train -- it's related to training the cargo aircraft crews for sure. I just would break out the number for you..

Okay. No problem. That's good color. Then moving on, on the commercial site on MAX. Obviously, MAX is getting quite close to its recertification, I guess, a couple of airlines and the North American market has spoken about ungrounding them pretty shortly. And Boeing has disclosed the backlog sitting around about 3,300 aircraft.

So my question is really on, if you can help us understand the size of the potential opportunity for CAE from MAX, in terms of what is the incremental demand potential for simulators, as well as training as MAX comes back? Or do you do see maybe a pent-up demand, after they have delivered maybe a couple hundred or so aircraft?.

Well, I don't think obviously, there's a short term dynamic that's occurring here. But I think, when you look at all of the -- that the whole order book that you mentioned, that’s Boeing -- I mean, it's got a very solid order book, as we know, very large.

And when you look at the -- basically, excluding lessors, there's about 73 operators at the moment who account for about 1,300 of those orders on MAX, that we know they don't currently have MAX training solution. So that gives you an idea of -- the opportunity for us over time.

And I think that the dynamic will be similar to the steady state to other narrow body deliveries that we've had. So in the past year, we've given you that the market drivers statistics that we use at every about 30 narrow body deliveries necessitates simulator to market.

And now that it's clear that the match will require a simulation based training, you expect that, airlines that previously were going to be able to succeed their MAX NG fleet, and we're going to transition to a MAX.

Well, maybe then they're going to be -- well, most likely, they're going to be less using their NG simulators because we more advantageous to them to move to a permanent solution using MAX buyers or outsourcing their training to providers like ourselves, which offer MAX train.

So I guess, that gives you some of the -- I guess, as a steady state, I expect this to be just like another narrow body type..

Right. And I think Boeing was recently mentioning about some updated pilot training requirements that the regulators from the U.S., Canada and Europe have mapped out.

Have you been involved in those discussions at all? Or do you expect discussion going forward?.

Well, I wouldn't break it down. I’ll leave it. Boeing answered the overall questions that have asked. But I could tell you though, that we have high level meetings. I personally I’m going to call every month with senior leadership of returning to service at Boeing.

We're a partner to them to get the fleet back in the air and to support the authorities and our customers, because we have the great majority of sales of simulators for 737 MAX we have. So you can well imagine that we're involved, but in terms of the decision-making its coming out of the authorities..

Okay. Thank you for that. That's all my question..

Thank you. Our next question comes from the line of Fadi Chamoun with BMO. Please proceed with your question..

Yes, good afternoon. Thank you. Sonya, we're getting a lot of question about this Canada wage program, I guess. And I think, you've collected year-to-date, somewhere around $80 million and I think in this quarter, around $35 million.

Should we consider these as income that would have otherwise basically subsidizing or offsetting what could have been wage reduction or headcount reduction or things like that? Or is there a bottom line impact from these wage subsidy program on the first half results? And if you can -- if you have visibility, can give us an idea what do you expect from those kind of programs in the second half of the year?.

So you should absolutely look at it as -- alternative as offset as you mentioned. So far, the mitigation measures, we sought out different government programs globally and we got about, I think, 20 different countries. The lion's share is really in the Canadian program.

So the other countries, sometimes it's literally just a flow through that the government's use to subsidize the employees. The Canadian program is slightly different. So in total, as you mentioned a $35 million in the quarter.

But as you'll remember, some of the measures that we took quite early on was highly impactful 2,400 people furloughed or reduced work weeks and so on. And so what this program essentially allows you to do is to call back those furloughs and employees and work week. So essentially, neutralizing the impact, so it's relatively neutral.

As for the future, you know, the program is continually being changed. It's still there until June and a lot of moving parts to really kind of be able to answer that question..

Okay. Okay, that's great. The other question I had is on the cadets -- on the cadet training program. I think you have a number of cadet training program with various airlines.

Has these programs been kind of scaled back? I am just trying to understand how kind of airlines are looking at some of their -- the initial training requirements going forward? Is that scaling back? Are you seeing that kind of remain, was their original plan despite the pandemic?.

Well, that's exactly the case, Fadi. People have maintained their original plans. Don't forget it, it take at least, you know, neighborhood of 2 years to create a pilot. And actually, we came out with our CAE pilot forecast just yesterday. You have a look at it, I still think it's a good -- it's a good career to become a pilot.

And because we were in a pilot shortage situation and as you will recall in the not so distant past and although, obviously -- the pilot profession business affected significantly in the shorter term because of COVID, the wave of retirements as well as, basically movements in the workforce will recover.

And we will need -- quite a number of pilots going forward. So, going back to your question, the -- all of our programs have been maintained. In fact, we won more business. We won for example, with Boeing we announced that last quarter a contract to deliver pilots for them. So I haven't seen any impact. In fact, our flight hours are basically the same.

If the new effective we've had is, where we've had to close centers temporarily, for example, in Australia, in Melbourne because of COVID that's affected our flight operators.

But at the end of the day, going back to our high demand forecasts, what we forecasted demand for 27,000 new pilots by the end of 2021 and if you think about it takes two years to make a pilot. You want to make sure that you maintain it. That's what our airline partners are doing..

Okay. That's great color. Thank you. And maybe one last question.

You said 35 to 40 deliveries of full flight simulator this year, if you have enough visibility, can you give us an idea, what kind of orders run rate do we expect this year?.

What kind of run rate event started this --.

Run rate on new order sale?.

Go ahead, Sonya, maybe you answer the question?.

I think, what we've said is that, we expect order intake or order sales number seems to be lower this year reflecting the environment but --.

Okay. That’s the orders..

-- that we’ll keep and expect to keep a market leading share of that. .

Yes. That's exactly right, Fadi..

Okay. Thank you..

And thank you. Next, we have a question from the line as Kevin Chiang with CIBC. Please, go ahead..

Hi. Good afternoon. Thanks for taking my question here. Just sort of color on the Qs and how you think about it Sonya. So if I look at the quarter, you did a mid-teen margin with utilization up 49%. The last time, we saw your margins around these levels, you see a utilization of somewhere in the 60s.

And I know mix plays a role and you've obviously taken a lot of cost cutting measures here.

But do you think you can get back to pre-pandemic civil margins at a significantly lower utilization rate than you were seeing, I guess, pre-crisis, just given where your revenue mix sits today?.

I think, I’ll maybe comment on the quarter first and this -- you were preparing a highly impacted Q1 versus kind of maybe a little bit, I guess, more stabilized dynamics in Q2 and what it highlights is that, the model has really good operating leverage, right? So we saw more volume on the -- through the utilization.

And also, like you said, mix matters, and it has an impact. So there's a higher proportion, a faster recovery on back, which is generally higher yield. But also there was a higher volume on the product side. So you'll remember that there was only two deliveries last quarter.

So revenues driven on the delivery side and so 10 in this quarter, helped also on the volume and drive the leverage there. Going forward.

I think, listen, it's a bit early to kind of give outlooks for the future -- for upcoming years, but that's the reason we've been engaged in this restructuring program and really, kind of, focusing on internal processes, the optimization of our asset base footprint, really focusing on digitally enhancing processes.

And, kind of, taking the lessons learned with the pandemic and more and becoming even more efficient, right, and so driving $50 million of recurring structural savings for FY 2022 and on.

And so, that'll be part of that conversation, because the volume doesn't necessarily have to come up at the same level or at the same speed to drive a higher level of profitability..

I appreciate the color there. Maybe just related to healthcare, it looks like a little bit of a leadership change there with Heidi Wood just taking over as President or being appointed as President. And I think, Marc, you mentioned some of the opportunities that you see within healthcare that may have materialized here during the pandemic.

Just wondering, as you look at those opportunities, do you see those as being complimentary to the previous strategy you had within healthcare? Or should we think about this segment now, kind of pivoting towards another direction? And it feels like the division has been in a bit of an incubation phase for this quite a while now.

Just wondering when you think it hits an S-curve within the slow trajectory, and it kind of breaks out of this kind of $30-some odd million of quarterly revenue, which seems to generate pretty consistently right now..

Well, look, I tell you I am very bullish on Heidi Woods leading our medical division, absolutely sure about that. I think if anything has been -- is going to be propelled going forward, post-pandemic, one of them is going to be the propensity for simulator-based training in healthcare.

And I think what -- we’re quite happy, and I know, I just got to -- had a review with Heidi with regards to the Healthcare division. And they're very, very complimentary of the people in the organization, products and services that we have.

As I've mentioned before, the products that we have in the Healthcare division are very profitable, and in a lot of cases more profitable than in our core -- more core divisions. And it's a question of volume. It’s a question of volume. We know that -- we expect that the volume is there.

She's been meeting with a lot of customers and came -- came away from very encouraged. So, it's -- I think I would basically say that we're putting executive in charge here and the executive with a lot of bandwidth, a lot of experience, and a lot of business experience.

And that is singularly going to propel our products and services, and lead the workforce, to what I know, is the growth that's out there in this business, which is only going to get better in this post-pandemic world..

That makes sense. Maybe just last one for me. I think there's a mix of kind of repositioning some of your assets, just given all that's happening in the world today. And you did put out your pilot outlook yesterday.

I'm just wondering, when you think of repositioning your assets, do you think of positioning them based on kind of decade outlook of where you see pilot demand and where you see various growth rates across various continents? Or are you taking a more near term approach and trying to position those assets where you see maybe near-term growth where Asia-Pac might be returning faster to travel and some other markets are a little bit more constrained because of travel restrictions?.

No. Look, what -- just in rest of our business, we always take a strategic view on it. And it's certainly not a short-term consideration.

As I mentioned, when we talked about the restructuring, and the asset relocations and somebody the main -- Trade Center consolidations that we're going to -- that we're having, some of them that we've announced already -- is mainly looking at what is going to be the market demand or sort of the demand that we expect to be out there based on the forecast of the industry's recovery.

And, of course, the conversations with them -- we have with airlines around the world and business jet operators. I mean, this is one of -- again crisis favor like this one favors the leader.

And one of the consequences of that or maybe an artifice of that is the fact that we have conversations with a majority of the world's airlines, because they are customers in one way or form.

So, we're able to get a pretty good view of what training activities should be like over the next two to five years and that's what's the IR forecast is what we used to basically plan our footprint going forward..

That’s it for me. Thank you very much for taking my questions..

Thank you. And we now have a question from the line of Cameron Doerksen with National Bank Financial. Please proceed..

Yes. Thanks. Good afternoon. Question on defense, Marc, you had prepared remarks on the defense business there.

I'm just wondering, if you can go into maybe a little more detail on what the game plan is going forward to improve the profitability in defense because as you know it has been lagging for a number of quarters?.

Yes. Well, look, first and foremost, I think, I always say, there's nothing wrong with the defense business, so a few hundred million of orders when fixed. I say that, and I say that to the team all the time. So clearly, it's about growth, and you throw more growth.

And of course, we -- when we bid on projects, we certainly bid to be able to go into the contract with a market that will be accretive to see, I mean, obviously depends if it’s service or products contract.

So first and foremost, get more volume, and more volume, of course, that affect's your profitability, because you lower your overhead rates in which case that helps -- you -- even better makes you more profitable and more marketable, going forward in terms of winning bids.

At the same time, we can absorb more SG&A, and that's, where we get multi-year service contracts, that helps because you don't have to eat what you kill every year.

And we have a project underway, well, which -- its part of our overall restructuring and the improvement programs that we've launched and learning's to do things differently, with some of the insights that we've gained during a pandemic and before, and we call those eternally project Phoenix project Crossroads [ph], and those to me a couple of more growth will be the result in better execution, coupled with growth will result in -- well, I certainly expect to be double-digit margins in defense..

Okay. So that's good. Thanks. And just secondly on, I guess, maybe a capital allocation question. I think the free cash flow is probably trending a little better than what you might have expected earlier in the fiscal year.

So I'm just wondering, if you can comment on what the -- when the decision will be made to reinstate the dividend? If that's something that we should potentially expect the next couple of quarters?.

Well, I tell you, the capital allocation priorities haven't changed. We always take a balanced approach to invest in our first priority, which is accretive a sustainable growth opportunities, while maintaining a solid financial position. That's what we're going to be doing.

The current returns to shareholders have been there in the past obviously, and so it has been a function of level of excess free cash flow. And it's an ongoing discussion that we have with the Board. So I think we have to look at things on a case-by-case basis as we go.

But there are a lot of -- we see pretty interesting growth opportunities in front of us right now..

Okay. Fair enough. That's all for me. Thanks very much..

Thank you. And we now have a question from the line of Benoit Poirier with Desjardins Capital Markets. Please go ahead, sir..

Yes. Good afternoon. And thank you.

Just on defense, could you provide maybe an update on the large project contract that were impact early independent, and maybe that mix between equipment and services you're seeing these days?.

Well, I think, Benoit, once we said this year is in defense is a transition year, because of some of those issues that we have on large contracts, contracts under lease, which we were literally tools down and in some cases, still tool is down, and the level of the less attractive, because of our training centers because of pandemic related restrictions.

Certainly, beyond this current career, we should roll business and I'm quite encouraged with the Defense leader, Dan Gelston and the amount of insight he's driving the business, the amount of leadership and energy he's driving here. So I'm quite confident in that. In terms of product service mix, it's pretty similar to what has been in the past.

So Sonya, do you want to add to this?.

Yes. Its still, I think a higher proportion on the services side than the product side. And that's being reflected in the margin as well..

And the margin is about two-thirds I think?.

Yes..

Yes, two-thirds..

Okay. That's great. And maybe could you share any thoughts about your expectation for the new leadership under Daniel Gelston? And maybe, if you could give an update there related to your active bidding proposal, the amount that you tend to disclose every quarter? Thank you..

Well, I think I can -- said in previous question. I'm very pleased to have someone as Dan's caliber on board at CAE. Dan has a very positive energy that he brings to the team in defense.

And, I'm very, very confident that he's going to do great things to bring out the full potential of our business, which going back to your question previously, that was previously said, admittedly it was not the case for last couple of years.

So, he brings a wealth of knowledge and experience, specifically in a kind of business that we have in running in sell-side company, add special security agreements. We're a Canadian company leading that to be able to sell for example, the whole branch of the U.S. military, which we do.

He understands the landscape, within the current requirements in defense for multi-domain, warfare and the real going forward. What he's going to be training for -- to deal with new peer threats that are out there, which is different.

He understands the technological capabilities of CAE and really how to leverage them in the high value areas, like the contracts that I mentioned, during my remarks and from a single synthetic environment or Special Operations Command, I just I was using that example. So look, we've made some structural improvements in defense.

And so look, I think, stay tuned. We're confident that defense is a solid growth business for longer term and the latter part of your question I think the number that we have right now is $4.8 billion..

Okay, okay. That's right. And the last one for me.

You talk about the growth opportunities, how should we be thinking about CapEx post fiscal 2021, as there might be some catch up, given the growth opportunities you foresee?.

Benoit I think, we just came out with guidance for this year. So CapEx stood at $33 million was tracking little under the $50 million net debt that we provided those guidance and planning for $100 million for the year. Beyond that, I think, we'll wait until March and May.

So, some of that CapEx is related to footprint optimization, as we consolidate training centers. And, of course, we will pace investments with the level of demand in line with customer contracts.

But essentially where we have and we continue to see some opportunities or some platforms, where there's demand, where there's these opportunities, CapEx deployments, drive, nicely accretive returns. And really within five year horizons are driving 20% to 30% incremental returns. And it's a good proxy for cash flow.

So where we have -- we continue to see those opportunities. Well, we'll be acting on them..

Okay. Thank you very much for the time..

Thank you. And now we have a question from the line of Doug Taylor with Canaccord Genuity. Please proceed..

Yes. Thanks. Good afternoon and thanks for taking my questions. Just a couple for me.

Firstly, with respect to the restructuring benefits the $50 million that you were targeting, and I'm sorry if I missed it, but can you update us on where you are, what was recognized within the quarter or how you now expect the remaining benefits to ramp over the coming quarters?.

So we encourage $50 million of cost this quarter and we'll self test -- it'll kind of go into Q1 of next year with the bulk of those charges we expect this year, but there's a longer lead items with that asset relocations and facilities optimizations.

Now in terms of the benefits, the guidance and the info is $50 million of recurring structural savings starting at fiscal 2022. So we just started the program. And a good part of that program is footprints asset optimization will require some bit of time to consolidate the facilities.

And also as Marc just talked about all the digital process enhancements etcetera, that are underway and so on and ongoing throughout the year. So, we're really start seeing the benefits come through next year, maybe some a little bit of this year, but really next year $50 million of recurring structural savings..

That's helpful clarification. My second question is with respect to the types of deals that you're looking to potentially cut with some of your airline customers for outsourcing, training, and that's a certainly an exciting growth factor during this pandemic.

So when and if that happens, can you speak to whether there are incremental investments that would be required on your part or will you be taking on additional capacity or would all the potential business you would be outsourced to you be -- you'd be able to service within your existing portfolio and infrastructure? That would be helpful. Thank you..

I think it depends of the deal, obviously, that we look at. But if we look at past airline outsourcing that we've done, there's been quite a number of different types. But in a lot of cases, you know when we take over, for example, the partner’s existing assets, think about what we did with Japan Airlines, Singapore Airlines.

So they basically contribute their existing training assets or simulators. So that's one way of doing it. So either way we look at it. Our view it has to be accretive to CAE’s go forward picture. And I would expect that sometimes we're going to be combining assets to be able to do that..

Okay. So is there any -- go ahead..

Go ahead. Carry on..

I was just going to ask, I mean, given the pandemic is, obviously, a new phenomenon for the airlines, if that has changed the decision making with respect to outsourcing to favor a certain type of outsourcing arrangement versus prior cycles?.

I don't think so. No, I think look, at the end it's usually the same kind of dynamic. If you're an existing airline, and you have a trading operation, you still have it, don't forget ARC. And that's a great thing of our business, it's a regulated business, every six months, typically pilots have to go back for training.

So if you're an airline, you have to have -- either have the capacity for all your pilots to be able to train on a regular basis. And to take advantage of our nexus state initial training as you base got pilots retire or pilots furloughs with the movement in your pilot workforce. So you need the infrastructure.

So if you’re already in airline and most likely you had that infrastructure, so typically, what you bring into the deal is that those assets. And we're very good above -- because that's our business and we do it for a very large number of airlines to tune of a million flight hours a year or a million training hours a year.

We're very good at extracting maximum utilization by efficient scheduling, efficient deliveries, of courses. So, typically, what we would do, is has less of a need and then we're able to offload some of that capacity and sell it for third-party training. So I wouldn't expect the dynamic to change very much from that standpoint.

Except to say that in this kind of environment, we have more discussions, because people want -- the reason won’t understand that. Because if they can make their cost structure lower, which you could certainly do and more -- and perhaps even better, make it variables, so only use -- you only pay for what you use and when you use it.

Because typically, for example, the Western World in a normal year, which, of course, this is not a normal year, but seasonal patterns are, you don't train in the summer, because you're flying, but if you have your training infrastructure, then you paying for it, that I ergo being in advantage.

And the only thing, of course, is that these days with -- obviously, with the pandemic still very much out there, pilots -- airlines have a lot on their places these days. And this is typically the same themes. So, hopefully, that gives you a bit of a broader color..

Yes, it's very helpful. Thank you very much..

Thank you..

Thank you..

Thanks all the members of the Investment Committee for their questions. With the time remaining, I'd like to now open the call to members of the media, should there be any questions from members of the media..

Thank you. Now we're going to continue on. This is a question-and-answer session for the press media. [Operator Instructions] Members of the press and media, we welcome you to register your questions. [Operator Instructions] The first question from the press and media comes from Ross Marowits with The Canadian Press. Please proceed with your question..

Hi. Marc, I have two questions for you. One is you talk about how the recovery is going to be closely tied to the lifting of travel restrictions.

Do you have any sense of timing of that or has your view on the timing changed recently?.

Well, I have the same view as everybody else, to be very frank and it hasn't changed.

I mean, we model -- our planning based on the IATA forecast and update at the highest level, and that's complemented with discussions that we have with individual airlines, because there’s no exaggeration that the bulk of the world's airlines are customers one way or another.

So I think that way that translates is IATA forecast about a 66% reduction in passenger traffic this year.

So that's what we would use, overall, and that it also calls for air passenger traffic to recover to 2019 levels and late 2023, early 2024, maybe that gets better because of news we had yesterday, maybe -- but to hopefully does, that would be great. But our planning is -- hasn't changed from those statistics I just mentioned..

Okay. And the second thing is, I'm wondering, in terms of defense spending, with the new administration in the U.S. coming in.

Are your expectations of orders or business going to change?.

No, no. And the reason I would tell you -- two reasons. Number one, is that, first of all, I will tell you that the day that the orders that we can get at CAE, being a proxy to the size of U.S. Defense Department, I would be very happy.

I think we have lots of opportunity to grow within the defense budgets that are out there today and then are perceived to be out there under any reasonable scenario going forward.

The other thing is that, the product and service that we provide, we by definition, align ourselves to the defense strategy and expected defense -- where the money is going to be spent over the next few years. And the great thing about, for example, governance, and specifically, if I was to use the largest defense market in the world, the U.S.

Defense Department, basically, they tell you what they're going to spend on or what -- over the next few years. So, our investments in research and development and bidding activity are very much aligned for those national defense priorities. So I feel very good about our prospects for a growth in the next few years.

And, and then we -- and I think one thing that's obvious in there, it's understand is, what we do is simulation based training. That actually saves money relative to -- for example, training, which you have to do, you have to continue to do, so if we can move more of that training -- simulation-based training, well, obviously that reduces cost.

You're on the sphere of goodness there..

So, you're not concerned about new government reducing spending on defense?.

No..

Okay. Thank you..

Thank you. And up next, we have Allison Lampert with Reuters. Please proceed..

Hi. So, when would you expect non-U.S.

regulators Transport Canada and the other to lift the MAX grounding compared with the FAA? And as a follow up, are you -- so what kind of timing are you seeing in terms of bookings for the MAX training?.

I was -- well starting with your first question, Allison, look, I can't answer for the regulators. But comments that I've seen it you saw probably used from the FAA literally today as positive comments from the head of the FAA today.

I would expect transport to not be far behind typically, just because, they've been doing their certification testing in lockstep, but again, I can't speak for them. And you know, the comments that I've seen from the Head of ESSA, Patrick Key, most recently on the recovery of this certification of the 737 MAX have been positive.

So expect that would come sometime behind. But again, I am not the guy that really can answer with any certainty with regards to except that it's all looking very positive at this stage. With regards to MAX orders, we're booking them now. We, we have, again, the lion's share of the simulators for the MAX have been won by CAE.

And I will expect that we’re going to continue to do well there and we'll continue to deploy maximally restore our own training centers in that regard..

And what about bookings for the training centers? When are you seeing those -- when are the people coming in?.

Well, actually the few people are training now give you an idea of what for example, you're in Canada. Air Canada has tumor MAX simulators and I can tell you those even though the fleet has been grounded as it has been around the world, Air Canada's maintains the training of their pilots.

I think they had about memory serves about 500 pilots that were trained on the 737 MAX and they've continued to keep those pilots trained. So, training activity has not stopped, it’s continued during this whole time because of the time it takes to ramp up pilots. So it may take only a day or two to take an airplane out of mothballs.

But if you haven't prepared for it, it could take you literally months to get to your pilot's -- back up to speed to be able to fly them..

Okay. Operator, that's all the time we’ve had for questions this afternoon. Again, I want to thank members of the investment community and media for their time, listening to us and for the questions. And remind you the transcript of today's call can be found on CAE’s website. Thank you and good afternoon..

Thank you. And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day, everyone..